State employee pension plan officials highlight successes of previous reforms and need for new funding mechanism

In their first testimony in front of the Public Pension Working Group, the Kentucky Retirement System (KRS) told lawmakers the system needs funding mechanism that were included in 2018 reform package and stated the hybrid-plan implemented for KRS in 2013 is working.

KRS Executive Director David Eager told the panel the level-dollar funding mechanism that was a part of the pension reforms in the 2018 session is “absolutely necessary” to deal with the issues facing the system.

The level-dollar funding formula was included in the 2018 reforms passed by the General Assembly and then overturned by the Kentucky Supreme Court. The formula seeks to ensure the correct amount of funds are put toward the systems up front rather than backloading payments, as has been done previously.

Another potential reform mentioned by Eager was having one independent investment management firm to oversee the investments of all retirement systems—KRS, Kentucky Teachers’ Retirement System, and Judicial Retirement System—instead of having separate investment boards for each system. Eager said some other states are beginning to move toward this model and added it could lower administrative costs for the system.

In his testimony, Eager also noted his recent interview with The Bottom Line and reiterated it was not just the underfunding of the system by the legislature that led to the current 13% funded level of the system. Eager said the system would still have around $10 billion in unfunded liability, compared to the current $13 billion, even if the legislature had appropriated additional funds in the past.

Reasons for pension crisis from KRS

A big topic of discussion in these meetings is that the legislature had previously funded what previous governors and retirement systems were requesting, but because of bad assumptions, the funds allocated were not enough. Eager said that was an issue coupled with other contributing factors led to the current crisis. He stated that even if many of those factors had gone differently, the system would probably still only be funded in the 50% range.

System representatives and legislators also discussed the three different tiers within KRS that have come as a result of different reforms over the years. The most recent major reforms to KRS, which were passed in 2013, created the hybrid cash-balance plan where new hires (hired after 2013) are now in a plan that looks more like a 401k plan seen in the private sector, but has a guarantee that the employee will not lose any money on their contributions.

Eager said he believes the 2013 reforms are working well for the retirement system and emphasized it will take many years to see the full effect of the reforms as new people enter the system.

Senate Majority Floor Leader Damon Thayer brought up the portability of the new hybrid plan as state government employees in tier 3 are vested after five years and can take their contributions as well as the employer contribution, base interest, and employer pay credits with them to a new job outside state government if they so choose.

Eager will return to testify in front of the Public Pension Working Group on Thursday to discuss more aspects of the pension plan and where it currently stands.